Complex Made Simple

Good news or bad? What to expect from today’s OPEC meeting

The members of OPEC are gathering behind closed doors in Vienna today to decide whether the producers in the cartel should extend the oil production cuts that were agreed upon last December.

The oil producers will also assess compliance of the deal, which sought to cut production by 1.8 million barrels per day (bpd) in order to bring stability in the global oil market.

The members will also discuss ways to convince non-member producers to maintain their commitment in the future.

Meanwhile, in a major development on Wednesday, the Joint Ministerial Monitoring Committee (JMMC), set up to watch the compliance of the multi-nation agreement, has confirmed that the parties have exceeded expectations in the last six months, with total compliance rate hitting 102 per cent.

The committee also recommended that OPEC extend the deal for another nine months. Apparently, all members except Kazakhstan have expressed their willingness to extend the deal.

Analysts also expect that the outcome of today’s meeting will be positive for the oil market. Responding to the news of the monitoring committee’s recommendation, WTI Crude rose to a fresh monthly high of $51.76 on Wednesday.

Cheating on compliance?

Some analysts have, however, expressed their skepticism over the compliance of the agreement – even expressing doubts that it will be reached at all in the future.

“In regards to an extension, while the technocratic oil ministers will likely cite elevated inventories and potentially the lack of long-term investment in conventional projects as reasons, we think that the domestic concerns of state leaders in their respective capitals will be the driving force, especially given the stakes if oil prices were to crater once again,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.

“Assuming an extension is achieved, an extended stay in the mid-fifties per barrel would likely be fine for the flusher GCC producers and key non-cartel producers like Russia — allowing them to execute on core priorities; however, for others it will more just keep them on much needed life support,” she added.

Meanwhile, Lukman Otunuga, Research Analyst at FXTM, remarked: “With the production cut agreement still not legally binding and no punishments in place for those who don’t adhere to its stipulations, there remains a strong temptation for individual countries to cheat in a bid to gain more market share.”

US Shale quagmire

Analysts have once again reiterated their concerns over increasing threat from US Shale production.

“While WTI Crude is likely to appreciate higher if OPEC and Non-OPEC producers extend the current output cut deal by another nine months, the question still remains of how U.S Shale will react,” said Otunuga.

“I believe that U.S Shale is a significant threat to the OPEC deal, especially when considering how the surging output from the U.S has seized market share from other OPEC members,” he added.

“We have noted before that the growth in US shale production will put a cap on oil prices, at least barring a major geopolitical blowout that takes significant quantities of production elsewhere offline,” Croft said.

End of OPEC?

Has OPEC lost control over the oil market?

Otunuga says that the bearish sentiment towards oil remains intact amid the oversupply concerns with the “prisoner’s dilemma” between OPEC and U.S Shale limiting upside gains.

“While it may be too early to say that this is the end of OPEC, U.S Shale has considerably weakened the cartel’s grip on the global markets.”